Whole life
People who choose Whole Life Insurance want a lifetime policy with zero risk. They want the Insurance company to guarantee, for life, the monthly cost. If an epidemic breaks out, significantly killing off a large part of the population and raising mortality costs to the Insurance company, this policy cost isn't affected at all. Conversely, if science reduces heart disease rates and cures cancer, lowering deaths and mortality costs, the Insurance company reaps more profits because it continues to receive the higher, guaranteed mortality charges of the Whole Life policy.

Finally, a Whole Life policy pays a minimal but guaranteed rate of return—usually from 3-1/2 to 4-1/2 percent for life. In fact, the policy contains a page showing what the cash value will be for each year of the future. Today 4-1/2 percent guaranteed looks good. Ten years ago, when interest rates were in the double digits, it looked terrible.

Universal Life
In the 1980s, interest rates were rising to unexpectedly high levels, approaching 20 percent. Inflation was running rampant. Not only were the fixed rates of Whole Life eliminating most new sales, but existing customers were dropping their old policies in droves. One by one, Insurance companies began to offer a more flexible policy called Universal Life Insurance, offering flexible rather than fixed interest rates on the cash value. At that time, 13 or 14 percent returns were common. Universal Life later proved to be both good news and bad news for consumers.

The good news is that Universal Life is a flexible product. Everything that's fixed and guaranteed in a Whole Life policy is flexible and non-guaranteed in Universal Life. The risks of changes in mortality costs, expense costs, and interest rates are mostly passed on to the buyer. If costs decrease or interest rates rise, the customer reaps the benefit. But now the bad news: If costs rise or interest rates plummet, primarily the customer takes the hit. The insurer takes only two risks: 1) the Universal Life policy has a ceiling on how high the mortality charges can go, so the insurer could get burned if mortality expenses go sky-high, and 2) if interest rates drop to near zero, insurers still have to pay a guaranteed minimum interest rate on the cash value—usually 3 to 4-1/2 percent.

Variable Life
When attached to Life Insurance, the Term variable means that customers have half a dozen or more investment options with their cash value—including investing in the stock market. The good news with variable policies is that you have the potential to outperform what you would have earned under a nonvariable contract. The bad news, like any stock market risk, is that you can lose part of your principal.

> Visit the Insurance for Dummies website.

From Insurance for Dummies © 2001 by Wiley Publishing, Inc. © 2000 Text and Author Created Materials Copyright Jack Hungelmann. Used by arrangement with John Wiley & Sons, Inc.

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